Payroll FUTA Credit Reduction for 2023
Employers in California and New York are required to pay an additional 0.3% in Federal Unemployment (FUTA) tax on 2022 wages due to a retroactive adjustment to the FUTA tax rate.
Square Payroll will calculate, debit, and pay this tax adjustment on your behalf. Impacted employers will receive an email in January 2023 with the calculated FUTA credit adjustment debit amount.
You can read more about FUTA Credit Reduction on the IRS website or the Department of Labor website. Additional answers to frequently asked questions can also be found below.
These two states are credit reduction states because they have taken loans issued from the federal government to pay state unemployment benefits. Due to an inability to repay the loans within the required time frame, the credit that employers normally receive has been reduced by 0.6%, against the full FUTA tax rate of 6.0%.
This credit reduction means employers in these states pay an effective tax rate of 1.2% in comparison to the normal 0.6% of FUTA that has been calculated and debited during payroll runs in 2023.
The 2023 FUTA tax rate is 6.0% and is calculated on the first $7,000 of wages paid to each employee. Employers typically receive a 5.4% credit for paying state unemployment taxes, which brings the net FUTA tax rate down to 0.6% (and the rate at which Square Payroll has been calculating and paying throughout the year).
Because this 5.4% credit was reduced by 0.6% in 2023 for employers in California and New York, the net FUTA tax rate is now 1.2%. In a formula, it looks like this: 6.0% − (5.4% − 0.6%) = 1.2%.
The credit reduction with a new effective tax rate of 1.2% equals about $84 per employee when applied to the federal unemployment-taxable wage base of $7,000 (previously $42 max per employee per year with a potential increase of $42 per employee).
Square Payroll will calculate, debit, and pay this tax on your behalf. In early January 2024, you will receive an email with the additional amount Square Payroll calculated. You must either accept or decline the payment amount Square Payroll calculates by January 29, 2024.
If no action is taken by January 29, 2024, Square Payroll will attempt to debit and pay the additional FUTA tax on your behalf.
Your annual Form 940 will reflect the credit reduction and the total FUTA tax owed for tax year 2023. Form 940 and the associated tax payments will be remitted to the IRS by January 31, 2024.
States are required to repay their outstanding federal loans by November 10, 2023. Shortly after that date, the U.S. Department of Labor released a list of states and their associated credit reductions. Because of the timing of this release and the fact that the tax applies to the entire year, Square Payroll must retroactively calculate and debit the additional tax in January.
If you do not take action by the deadline of January 29, 2024, Square Payroll will attempt to debit and pay the additional FUTA tax on your behalf.
If you decline the FUTA tax calculated by Square Payroll, we will not attempt to debit and pay the additional tax on your behalf. You will be responsible for making this payment directly to the IRS by January 29, 2024. Failure to do so may result in penalties and interest.
You can find more information on how to make federal payroll tax payments in our Support Center.
Note: The US Virgin Islands was also impacted by the FUTA credit reduction in 2023 but Square Payroll does not currently support payroll processing in the US Virgin Islands.